It's you, dear ratepayer. You're the bank that pays utilities to borrow your money.
In a recent Concurrence to a Federal Energy Regulatory Commission granting of incentives to an independent transmission developer, Commissioner Mark Christie makes a great plain language analogy that anyone can understand.
In a recent Concurrence to a Federal Energy Regulatory Commission granting of incentives to an independent transmission developer, Commissioner Mark Christie makes a great plain language analogy that anyone can understand.
The Commission’s incentive policies— particularly the CWIP Incentive, which allows recovery of costs before a project has been put into service—run the risk of making consumers “the bank” for the transmission developer; but, unlike a real bank, which gets to charge interest for the money it loans, under our existing incentives policies the consumer not only effectively “loans” the money through the formula rates mechanism, but also pays the utility a profit, known as Return on Equity, or “ROE,” for the privilege of serving as the utility’s de facto lender. There is something wrong with this picture.
CWIP, or Construction Work In Progress, is a rate mechanism that allows utilities to stuff all their costs of developing and building a new transmission line into a special account that earns interest for the utility while it is engaged in permitting and construction. Of course, captive electric ratepayers are the ones paying this interest, often to the tune of hundreds of millions of dollars, before even one electron is transmitted. Worse yet, consumers will continue to pay, even if the project is later abandoned and never built.
Consumers are on the hook for the costs of transmission. When a new transmission line is needed, the utility spends some of its own money, and borrows some from a bank, to finance the construction. Consumers pay principal and interest on this amount until it is paid off, just like your home mortgage. No problem there, however FERC grants special incentives to the utility on top of the already sweet interest rates they are granted, which are often upwards of 10%. Just try finding an investment that pays you a guaranteed 10% over 40 years. You can't. Isn't that generous enough?
No. FERC sweetens the pot by increasing the interest rate if the project is especially risky. Why? The utility has been ordered by the regional transmission organization to construct the project. And it is guaranteed to get all its money back, plus interest. Why do they need a couple extra points on the interest rate? Isn't that just too much frosting on the cupcake?
In addition to the ROE (interest) incentive, FERC grants all projects ordered by the RTO what is known as the abandonment incentive. That incentive guarantees that if a project is later cancelled by the RTO, the utility may collect all the money it has spent, plus interest, from consumers who never get a thing in return.
Does that sound fair to you?
It doesn't sound fair to Commissioner Christie, either. His concurrence is a breath of fresh air from federal agency that seems to care more about the utilities it regulates than the consumers it exists to serve.
Furthermore, when a project is abandoned, it's nobody's fault. The utility points the finger at the RTO that mistakenly ordered the project in the first place. However, that's a coy pretext. The utility is the one who begged to have the RTO order them to build the project in the first place. Oftentimes, the utility is the one that originally dreamed up the project, and asked the RTO to create a "need" for it. Nobody, not even FERC, cares that the RTO ordered a project that cost the ratepayers hundreds of millions of dollars and was never built. There is no investigation into what went wrong. If the RTO makes a $500M mistake, there ought to be some accounting, just to find the error and prevent a similar mistake in the future. But FERC doesn't care to find out why the project was ordered and subsequently cancelled. No harm, no foul.
However, the consumers shoulder all the financial burden of the error. They have to pay back all the money that has been wasted on a project that nobody needs and which is never built.
Finally... a FERC Commissioner brave enough to stand up for consumers! FERC has become all too political lately... and when politics abound, regulation is forgotten. Regulation is a learned science. When FERC is populated with political deal makers and special interests, its decisions often conflict with regulatory principles. Commissioner Christie is an experienced regulator with a wealth of experience. We need more commissioners like him!
Consumers are on the hook for the costs of transmission. When a new transmission line is needed, the utility spends some of its own money, and borrows some from a bank, to finance the construction. Consumers pay principal and interest on this amount until it is paid off, just like your home mortgage. No problem there, however FERC grants special incentives to the utility on top of the already sweet interest rates they are granted, which are often upwards of 10%. Just try finding an investment that pays you a guaranteed 10% over 40 years. You can't. Isn't that generous enough?
No. FERC sweetens the pot by increasing the interest rate if the project is especially risky. Why? The utility has been ordered by the regional transmission organization to construct the project. And it is guaranteed to get all its money back, plus interest. Why do they need a couple extra points on the interest rate? Isn't that just too much frosting on the cupcake?
In addition to the ROE (interest) incentive, FERC grants all projects ordered by the RTO what is known as the abandonment incentive. That incentive guarantees that if a project is later cancelled by the RTO, the utility may collect all the money it has spent, plus interest, from consumers who never get a thing in return.
Does that sound fair to you?
It doesn't sound fair to Commissioner Christie, either. His concurrence is a breath of fresh air from federal agency that seems to care more about the utilities it regulates than the consumers it exists to serve.
Furthermore, when a project is abandoned, it's nobody's fault. The utility points the finger at the RTO that mistakenly ordered the project in the first place. However, that's a coy pretext. The utility is the one who begged to have the RTO order them to build the project in the first place. Oftentimes, the utility is the one that originally dreamed up the project, and asked the RTO to create a "need" for it. Nobody, not even FERC, cares that the RTO ordered a project that cost the ratepayers hundreds of millions of dollars and was never built. There is no investigation into what went wrong. If the RTO makes a $500M mistake, there ought to be some accounting, just to find the error and prevent a similar mistake in the future. But FERC doesn't care to find out why the project was ordered and subsequently cancelled. No harm, no foul.
However, the consumers shoulder all the financial burden of the error. They have to pay back all the money that has been wasted on a project that nobody needs and which is never built.
Finally... a FERC Commissioner brave enough to stand up for consumers! FERC has become all too political lately... and when politics abound, regulation is forgotten. Regulation is a learned science. When FERC is populated with political deal makers and special interests, its decisions often conflict with regulatory principles. Commissioner Christie is an experienced regulator with a wealth of experience. We need more commissioners like him!
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